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Comparing Sector ETFs and ETNs

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Exchange traded funds (ETFs) are a perfect tool for asset allocation. But be careful -- ETNs are lumped in the same category, but can be very different in terms of holdings, fees, and liquidity.

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I am a big fan of asset allocation. Having investments that zig when others zag reduces downside risk and increases compound annual returns. I wrote a four-part series on the topic as well as a special report entitled Asset Allocation Strategies. The report includes actual portfolios with specific ETFs and ETNs mentioned.

ETFs Are Perfect for Asset Allocation.

For the quickest-fire exposure to all of the important asset classes, exchange-traded funds (ETFs) are the way to go. With just one purchase, you can achieve diversified exposure to virtually anything, be it China, commodities, health care stocks, or precious metals. In a March 2008 joint survey of investment professionals conducted by State Street Global Advisors and the Wharton School of Business, 67% characterized exchange-traded funds as "the most innovative investment vehicle of the last two decades" and 60% stated that ETFs had "fundamentally changed the way they constructed investment portfolios."

The problem is that there are too many ETF choices, about 1,000 at last count. How does one know which ETF in each asset class to buy? I can't go through all 1000 ETFs and ETNs in this article, but I can lay down some criteria to use in sifting out the ETF/ETN winners. Things to look for include:
  • Expense ratio (the lower the better)
  • Trading volume (the higher the better)
  • Legal structure (open-end ETF vs. unit investment trust ETF vs. ETN)
  • Portfolio holdings
I'll look at a few different sector funds and crown a winner based on the criteria above. To help me on my quest, I found three ETF comparison tools on the Web that look useful:

No positions in stocks mentioned.
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